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TFSA, tax changes: Time to review your financial plan

Getting a rate cut? Claim the deduction against your 2015 income

OTTAWA – The tax rules are changing in 2016 and even if Canadians don’t make enough to be hit by the new top federal income tax rate, their financial plans are going to need to be reviewed.

The vast majority of Canadians will not be affected by the new tax bracket for income over $200,000 a year, but everyone will see their tax-free savings account contribution limit be reduced back to $5,500 for 2016.

Combined with the new lower tax rate for income between $45,282 and $90,563, even those who aren’t in the top one per cent of income-earners should take a look at their finances to ensure they’re on track.

Peter Bowen, vice-president of tax and retirement research and solutions at Fidelity Investments, says for many people this might be the most important tax planning season they’ve ever had.

“With the changes just implemented both to tax rates and TFSAs, everybody needs to take care to make sure their tax planning is right for their own situation,” he said. “We always encourage people to get financial advice, but with these changes in place, it is more important than ever.”

What you need to do depends on your tax bracket — and with the wider range of brackets now, that means planning is more complex.

For those in the bracket that is seeing the rate cut, Bowen says to be sure to claim the deduction against your 2015 income to maximize its value if you’re planning on making an RRSP contribution. However, those who make more than $200,000 may want to delay claiming their RRSP contributions until 2016 due to the higher rate set to take affect.

EY tax partner David Steinberg says those making more than $200,000 may also want to look to maximize their 2015 income by crystallizing any capital gains or taking any bonuses or deferred income that may be due before the new higher tax rate kicks in.

“I think you’re going to see a lot of people managing taxable income,” he said.

How much will you be making throughout your career, what stage are you at in your career and where will you be in retirement? Those are all matters to ponder, he said.

“These are the questions that people need to be prepared to at least think about because then that decision of using an RRSP or using a TFSA becomes more important,” Bowen said.

The benefit of an RRSP is that you deduct contributions today and defer taxes until your retirement, when you will likely be earning less money and may be in a lower tax bracket.

In contrast, TFSA contributions don’t generate a tax deduction, but any investment income you earn with the money isn’t taxed. So, if you think you’re going to be in the same or higher tax bracket, putting money into a TFSA might make more sense.

Bowen noted it isn’t just high-income earners that will be hurt by the lower TFSA limits. Retirees looking to shelter a portion of their nest egg from tax will also be affected by the lower contribution limit even though they may fall into the low-income category.

“They don’t have to be wealthy to benefit from TFSAs,” he said.

The tax changes and TFSA rollback were part of the Liberal campaign platform during the federal election.

The cut to the second tax bracket will save Canadians making less than $200,000 up to $679 per person.

In addition to the rate changes, the Liberals ended the controversial income-splitting scheme for families plan put in place by the Conservatives that will see taxes rise for families where one parent earns significantly more than the other.

And more changes are expected.

The Liberals have promised a child benefit program to replace the universal child care benefit starting in July 2016.

The plan, promised during the election, will see more generous benefits for poor families and the amount reduced as family income rises, and will be entirely eliminated for high-income earners.

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